Increased Section 179 Expense Amount for 2003-2005

Under prior law, up to $25,000 of certain assets placed in service may be expensed under Code section 179. This amount was phased out if more than $200,000 of qualifying property is placed in service in one year. The election was generally required to be made on the original return and could be revoked only with consent of the Commissioner.

Under the new law, up to $100,000 (2003) may be expensed. This amount is phased out if more than $400,000 of qualified property is placed in service in one year. Both amounts are indexed for inflation. The new law also allows the election to be made on an original or amended return and can be revoked without permission.

Example: Assume Sam Smith's net income from self-employment (Schedule C) is $75,000, after claiming a section 179 expense deduction of $25,000 (on $50,000 of qualified purchases). Assuming Sam's income is taxed at 30% (based on total taxable income), Sam pays income tax of $22,500 on his Schedule C income. Self-employment tax of $10,597 is also paid.

Disregarding the change in depreciation, Sam could reduce his Schedule C income to $50,000. His income tax bill would decrease to $15,000, and his SE tax would be reduced to $7,065. Sam's total tax savings due to the increased section 179 expense election would be $10,502 ($7,500 - ($1,767 x 30% reduced SE tax adjustment) + $3,532).

Who Benefits?
The provision helps larger businesses deduct assets faster. Smaller businesses derive little or no benefit from the provision, because their annual asset acquisitions generally are not as large.

Our Advice
Before making a decision to write-off assets, be sure to compare how a faster write-off will affect your taxes in future years. Also consider the effect of lowering your social security contributions on future social security benefits.

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